Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No []

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

At November 1, 2003, there were 52,652,385 shares of registrants common stock
outstanding.

The accompanying unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with generally accepted accounting principles for
interim financial reporting and Securities and Exchange Commission regulations,
but are subject to any year-end adjustments that may be necessary. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Results of operations for the period ended September 30, 2003 are not
necessarily indicative of results to be expected for the year ending December
31, 2003.

Arch Coal, Inc. (the Company) operates one reportable segment: the production
of steam and metallurgical coal from surface and deep mines throughout the
United States, for sale to utility, industrial and export markets. The
Companys mines are primarily located in the central Appalachian and western
regions of the United States. All subsidiaries (except as noted below) are
wholly owned. Significant intercompany transactions and accounts have been
eliminated in consolidation.

The Companys Wyoming, Colorado and Utah coal operations are included in a
joint venture named Arch Western Resources, LLC (Arch Western). Arch Western
is 99% owned by the Company and 1% owned by BP p.l.c. The Company also acts as
the managing member of Arch Western.

The membership interests in the Utah coal operations, Canyon Fuel Company, LLC
(Canyon Fuel), are owned 65% by Arch Western and 35% by a subsidiary of
ITOCHU Corporation. The Companys 65% ownership of Canyon Fuel is accounted for
on the equity method in the Condensed Consolidated Financial Statements as a
result of certain super-majority voting rights in the joint venture agreement.
Income from Canyon Fuel is reflected in the Condensed Consolidated Statements
of Operations as income from equity investment. (See additional discussion in
Note F  Equity Investments).

The Company owns 34% of the limited partnership units of Natural Resource
Partners, LP (NRP) and 42.25% of the general partner interest. The Companys
investment in NRP is accounted for on the equity method in the Condensed
Consolidated Financial Statements. (See additional discussion in Note F 
Equity Investments).

Note B  Acquisition of Triton Coal Company

On May 29, 2003, the Company entered into a definitive agreement to acquire (1)
Vulcan Coal Holdings, L.L.C. (Vulcan), which owns all of the common equity of
Triton Coal Company, LLC (Triton), and (2) all of the preferred units of
Triton, for an aggregate purchase price of $364.0 million, subject to working
capital adjustments. Consummation of the transaction is subject to various
conditions, including the receipt by the Company and Vulcan of all necessary
governmental and regulatory consents and other customary conditions. Upon
consummation, the acquisition will be accounted for under the purchase method
of accounting in accordance with FASB Statement No. 141, Business Combinations.
The Company intends to finance the acquisition with cash, borrowings under its
existing revolving credit facility and a $100.0 million term loan facility at
its Arch Western subsidiary.

Note C  Preferred Stock Offering

On January 31, 2003, the Company utilized its Universal Shelf Registration
Statement and completed a public offering of 2,875,000 shares of 5% Perpetual
Cumulative Convertible Preferred Stock. The Company realized net proceeds of
$139.0 million from the offering. Dividends on the preferred stock are
cumulative and are payable quarterly at the annual rate of 5% of the
liquidation preference. Each share of the preferred stock is initially
convertible, under certain conditions, into 2.3985 shares of the Companys
common stock. The preferred stock is redeemable, at the Companys option, on or
after January 31, 2008 if certain conditions are met. The holders of the

preferred stock are not entitled to voting rights on matters submitted to the
Companys common shareholders. However, if the Company fails to pay the
equivalent of six quarterly dividends, the holders of the preferred stock will
be entitled to elect two directors to the Companys board of directors.

Note D  Adoption of FAS 143

On January 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 143, Accounting for Asset Retirement Obligations (FAS 143). FAS
143 requires legal obligations associated with the retirement of long-lived
assets to be recognized at fair value at the time the obligations are incurred.
Upon initial recognition of a liability, that cost should be capitalized as
part of the carrying amount of the related long-lived asset and allocated to
expense over the useful life of the asset. Previously, the Company accrued for
the expected costs of these obligations over the estimated useful mining life
of the property.

The cumulative effect of the change on periods prior to January 1, 2003
resulted in a charge to income of $3.7 million (net of income taxes of $2.3
million), or $0.07 per share, which is included in the Companys results of
operations for the nine months ended September 30, 2003. In addition, the net
loss of the Company, excluding the cumulative effect of accounting change, for
the nine months ended September 30, 2003 is $1.0 million more ($0.02 per
share), than it would have been if the Company had continued to account for
these obligations under its old method (there is not a significant difference
in the quarter ended September 30, 2003). The unaudited pro forma amounts below
reflect the retroactive application of FAS 143 as if the Company had adopted
the standard on January 1, 2002 and the corresponding elimination of the
cumulative effect of accounting change:

Three Months Ended

Nine Months Ended

September 30,

September 30,

2003

2002

2003

2002

(in thousands, except per share data)

As reported

Net income (loss)
available to
common
shareholders

$

9,252

$

1,640

$

(12,039

)

$

(3,635

)

Basic and diluted
income (loss) per
share

0.18

0.03

(0.23

)

(0.07

)

Pro forma

Net income (loss)
available to
common
shareholders

$

9,252

$

1,214

$

(8,385

)

$

(5,379

)

Basic and diluted
income (loss) per
share

0.18

0.02

(0.16

)

(0.10

)

If the Company had accounted for its asset retirement obligations in accordance
with FAS 143 for all periods presented, the asset retirement obligation
liability (including amounts classified as current) would have been $162.0
million and $166.6 million at September 30, 2002 and December 31, 2002,
respectively.

The following table describes the changes to the Companys asset retirement
obligation for the nine months ended September 30, 2003:

These interim financial statements include the disclosure requirements of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (FAS 123), as amended by Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure (FAS 148). With respect to accounting for its stock options, as
permitted under FAS 123, the Company has retained the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25), and related Interpretations. Had compensation
expense for stock option grants been determined based on the fair value at the
grant dates consistent with the method required by FAS 123, the Companys net
loss available to common shareholders and loss per common share would have been
changed to the pro forma amounts as indicated in the following table:

Three Months Ended

Nine Months Ended

September 30,

September 30,

2003

2002

2003

2002

(in thousands, except per share data)

As reported

Net income (loss) available
to common shareholders

$

9,252

$

1,640

$

(12,039

)

$

(3,635

)

Basic and diluted income
(loss) per share

0.18

0.03

(0.23

)

(0.07

)

Pro forma

Net income (loss) available
to common shareholders

$

6,953

$

(742

)

$

(18,988

)

$

(9,852

)

Basic
and diluted income (loss) per share

0.13

(0.01

)

(0.36

)

(0.19

)

Note F  Equity Investments

The Companys equity investments are comprised of its ownership interests in
Canyon Fuel and NRP. Amounts recorded in the Condensed Consolidated Financial
Statements are as follows:

September 30, 2003

December 31, 2002

(in thousands)

Equity investments:

Investment in Canyon Fuel

$

156,722

$

160,787

Investment in NRP

70,552

70,764

Equity investments as reported in the Condensed
Consolidated Balance Sheets

$

227,274

$

231,551

Three Months Ended

Nine Months Ended

September 30,

September 30,

2003

2002

2003

2002

(in thousands)

Income from equity investments:

Income from investment in Canyon
Fuel

$

1,392

$

1,222

$

17,596

$

2,291

Income from investment in NRP

4,265



11,362



Income from equity investments in the
Condensed Consolidated Statements of
Operations

65% of Canyon Fuel net income (loss)
before cumulative effect of
accounting change

$

(83

)

$

(1,477

)

$

11,842

$

(2,972

)

Effect of purchase adjustments

1,475

2,699

5,754

5,263

Companys income from its equity
investment in Canyon Fuel

$

1,392

$

1,222

$

17,596

$

2,291

The Companys income from its equity investment in Canyon Fuel represents 65%
of Canyon Fuels net income after adjusting for the effect of purchase
adjustments related to its investment in Canyon Fuel. The Companys investment
in Canyon Fuel reflects purchase adjustments primarily related to the reduction
in amounts assigned to sales contracts, mineral reserves and other property,
plant and equipment. The purchase adjustments are amortized consistent with the
underlying assets of the joint venture.

Effective January 1, 2003, Canyon Fuel adopted FAS 143 and recorded a
cumulative effect loss of $2.4 million. The Companys 65% share of this amount
was offset by purchase adjustments of $0.5 million. These amounts are included
in the cumulative effect of accounting change reported in the Companys
Condensed Consolidated Statements of Operations.

Investment in NRP

Summarized financial information for NRP as of September 30, 2003 and for the
three and nine months ended September 30, 2003 follows (in thousands):

Three Months Ended

Nine Months Ended

September 30, 2003

September 30, 2003

Results of Operations

Revenues

$

23,539

$

63,448

Income from operations

12,555

32,704

Net Income

10,112

28,268

Arch Coals income from
equity investment in NRP

$

4,265

$

11,362

September 30,

2003

Financial Position

Total assets

$

514,664

Total liabilities

202,703

Partners equity

311,961

Arch Coals equity investment in NRP

$

70,552

Income from the Companys equity investment in NRP for the three and nine
months ended September 30, 2003 represents the Companys share of NRPs
earnings for the period from June 1, 2003 through August 31, 2003 and the

period from December 1, 2002 through August 31, 2003, respectively. As
disclosed in the Companys annual report, the Company accounts for income from
its investment in NRP on a one-month lag.

Note G  Reduction in Force

During the three and nine months ending September 30, 2003, the Company
instituted ongoing cost reduction efforts throughout its operations. These cost
reduction efforts included the termination of approximately 100 employees at
the Companys corporate headquarters and its eastern mining operations and the
recognition of expenses related to severance of $2.6 million in the nine months
ended September 30, 2003. Of this amount, $1.6 million was reported as a
component of cost of coal sales, with the remainder reported in selling, general and administrative expenses. At
September 30, 2003, $0.2 million of the amounts recognized remained accrued as
a liability on the Companys Condensed Consolidated Balance Sheet.

Note H  Other Comprehensive Income

Other comprehensive income items under
FAS 130, Reporting Comprehensive Income,
are transactions recorded in stockholders equity during the year, excluding
net income and transactions with stockholders. The following table presents
comprehensive income:

Three Months Ended

Nine Months Ended

September 30,

September 30,

2003

2002

2003

2002

(in thousands)

Net income (loss)

$

11,049

$

1,640

$

(7,247

)

$

(3,635

)

Other comprehensive income
(loss) net of tax (net of
amounts reclassified to
earnings)

2,601

(8,078

)

(3,212

)

(3,583

)

Total comprehensive income (loss)

$

13,650

$

(6,438

)

$

(10,459

)

$

(7,218

)

Other comprehensive income for all periods presented is comprised entirely of
mark-to-market adjustments related to the Companys financial derivatives
positions for the periods when those positions were deemed to be effective
hedges.

Indebtedness to banks under variable rate,
non-amortizing term loan due April 18, 2007



150,000

Indebtedness to banks under variable rate,
non-amortizing term loan due April 18, 2008



525,000

6.75% senior notes due July 1, 2013

700,000



Other

140

7,342

700,140

747,342

Less current portion

69

7,100

Long-term debt

$

700,071

$

740,242

On June 25, 2003, Arch Western Finance, LLC, a subsidiary of Arch Western,
completed the offering of $700 million of senior notes and utilized the
proceeds of the offering to repay Arch Westerns existing term loans. The
senior notes bear a fixed rate of interest of 6.75% and are due in full on July
1, 2013. Interest on the senior notes is payable on January 1 and July 1 each
year commencing January 1, 2004. The senior notes are guaranteed by Arch
Western and certain of Arch Westerns subsidiaries and are secured by a
security interest in loans made to Arch Coal by Arch Western. The terms of the
senior notes contain restrictive covenants that limit Arch Westerns ability
to, among other things, incur additional debt, sell or transfer assets, and
make investments.

In connection with the repayment of the term loans, the Company recognized
expenses related to the write-off of loan fees and other debt extinguishment
costs. Additionally, the Company had designated certain interest rate swaps as
hedges of the variable rate interest payments due under the Arch Western term
loans. Pursuant to the requirements of Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
(FAS 133), historical mark-to-market adjustments related to these swaps
through June 25, 2003 of $27.0 million (net of tax) were deferred as a
component of Accumulated Other Comprehensive Loss. Subsequent to the repayment
of the term loans, these deferred amounts will be amortized as additional
expense over the contractual terms of the swap agreements. The swap agreements
contractual termination dates range from September 2005 through October 2007.
For the quarter and nine months ending September 30, 2003, the Company
recognized expense resulting from early debt extinguishment and termination of
hedge accounting for interest rate swaps of $2.1 million and $6.9 million,
respectively. Of these amounts, $2.1 million and $2.2 million, respectively,
related to the amortization of previously deferred mark-to-market adjustments.
The remaining $4.7 million of the expense recognized in the nine months ending
September 30, 2003 represents early debt extinguishment costs.

Changes in the market value of the swaps subsequent to the repayment of the
loans on June 25, 2003 are recognized as income or expense. During the quarter
and nine months ended September 30, 2003, the Company recognized income of
$10.6 million and $11.6 million, respectively, from changes in the market value
of the swaps. This amount is included in the line item Other non-operating
income in the accompanying Condensed Consolidated Statements of Operations.

On September 19, 2003, Arch Western established a new term loan facility that
provides for a $100 million term loan. The facility is subject to certain
conditions of borrowing, including the consummation of the Companys
anticipated acquisition of Vulcan. Currently, no amount is available to the
Company under the facility. If Arch
Western borrows pursuant to the terms of the facility, the term loan will be
due in quarterly installments from October 2004 through April 2007.

In April 2003, the Company agreed to terms with a large customer seeking to buy
out of the remaining term of an above-market coal supply contract. The buyout
resulted in the receipt of $52.5 million in cash during the quarter. The
Company recorded a deferred gain of approximately $15 million related to this
transaction, which will be recognized ratably through 2012.

Note L  Contingencies

The Company is a party to numerous claims and lawsuits with respect to various
matters. The Company provides for costs related to contingencies when a loss
is probable and the amount is reasonably determinable. After conferring with
counsel, it is the opinion of management that the ultimate resolution of these
claims, to the extent not previously provided for, will not have a material
adverse effect on the consolidated financial position, results of operations or
liquidity of the Company.

During the three and nine months ended September 30, 2003, the Company
recognized gains of $1.4 million and $2.9 million, respectively from sales of
land at one of its idle properties. These amounts have been recorded as other
operating income in the accompanying Condensed Consolidated Statements of
Operations.

During the three and nine months ended September 30, 2003, the Company
recognized income of $1.6 million resulting from the collection of receivables
which had previously been estimated to be uncollectible and had been fully
reserved in prior periods.

During the nine months ended September 30, 2003, the Company was notified by
the State of Wyoming of a favorable ruling as it relates to the Companys
calculation of coal severance taxes. The ruling resulted in a refund of
previously paid taxes and the reversal of previously accrued taxes payable. The
impact on the three and nine months ended September 30, 2003 was a loss of $0.8
million and gain of $2.5 million, respectively. During the three months ended
September 30, 2003, the Company revised its estimate of amounts it expects to
ultimately collect based on additional information obtained during such period.

During the nine months ended September 30, 2003, the Company received $1.4
million from a customer that did not meet its contractual purchase
requirements. This amount has been recorded as other operating income in the
accompanying Condensed Consolidated Statements of Operations.

During the nine months ended September 30, 2002, the Company settled certain
coal contracts with a customer that was partially unwinding its coal supply
position and desired to buy out of the remaining terms of those contracts. The
settlements resulted in a pre-tax gain of $5.6 million which was recognized in
other operating income in the Condensed Consolidated Statements of Operations.

During the nine months ended September 30, 2002, the Company recognized a
pre-tax gain of $4.6 million during the quarter as a result of a workers
compensation premium adjustment refund from the State of West Virginia. During
1998, the Company entered into the West Virginia workers compensation plan at
one of its subsidiary operations. The subsidiary paid standard base rates until
the West Virginia Division of Workers Compensation could determine the actual
rates based on claims experience. Upon review, the Division of Workers
Compensation refunded $4.6 million in premiums which the Company received
during the quarter ended June 30, 2002. Partially offsetting this gain was an
increase to the workers compensation accrual resulting in a pre-tax loss of
$3.3 million caused by adverse experience at several of the Companys
self-insured locations. These workers compensation items were recognized as
adjustments to costs of coal sales in the Condensed Consolidated Statements of
Operations.

The following table sets forth the computation of basic and diluted earnings
(loss) per common share from continuing operations.

Three Months Ended

Nine Months Ended

September 30,

September 30,

2003

2002

2003

2002

(in thousands, except per share data)

Numerator:

Net income (loss)

$

11,049

$

1,640

$

(7,247

)

$

(3,635

)

Preferred stock dividends

(1,797

)



(4,792

)



Net income (loss) available to common
shareholders

$

9,252

$

1,640

$

(12,039

)

$

(3,635

)

Denominator:

Weighted average shares  denominator
for basic

52,520

52,380

52,441

52,371

Dilutive effect of employee stock options

304

121





Adjusted weighted average shares 
denominator
for diluted

52,824

52,501

52,441

52,371

Earnings (loss) per common share

Basic

$

0.18

$

.03

$

(0.23

)

$

(.07

)

Diluted

$

0.18

$

.03

$

(0.23

)

$

(.07

)

For the nine month periods ending September 30, 2003 and 2002, employee stock
options did not have a dilutive impact because the Company incurred losses in
those periods. The Companys Perpetual Cumulative Convertible Preferred Stock
has not been considered in the calculation of the number of diluted shares
outstanding because the conditions necessary for the shares to become
convertible have not been met as of September 30, 2003.

Note O  Guarantees

The Company holds a 17.5% general partnership interest in Dominion Terminal
Associates (DTA), which operates a ground storage-to-vessel coal transloading
facility in Newport News, Virginia. DTA leases the facility from Peninsula
Ports Authority of Virginia (PPAV) for amounts sufficient to meet
debt-service requirements. Financing is provided through $132.8 million of
tax-exempt bonds issued by PPAV (of which the Company is responsible for 17.5%,
or $23.2 million), which mature July 1, 2016. Under the terms of a throughput
and handling agreement with DTA, each partner is charged its share of cash
operating and debt-service costs in exchange for the right to use its share of
the facilitys loading capacity and is required to make periodic cash advances
to DTA to fund such costs. On a cumulative basis, costs exceeded cash advances
by $13.0 million at September 30, 2003 (such amount is included in other
noncurrent liabilities). Future payments for fixed operating costs and debt
service are estimated to approximate $2.3 million annually through 2015 and
$26.0 million in 2016.

In connection with the Companys acquisition of the coal operations of Atlantic
Richfield Company (ARCO) and the simultaneous combination of the acquired
ARCO operations and the Companys Wyoming operations into the Arch Western
joint venture, the Company agreed to indemnify another member of Arch Western
against certain tax liabilities in the event that such liabilities arise as a
result of certain actions taken prior to June 1, 2013, including the sale or
other disposition of certain properties of Arch Western, the repurchase of
certain equity interests in Arch Western by Arch Western or the reduction under
certain circumstances of indebtedness incurred by Arch Western in connection
with the acquisition. Depending on the time at which any such indemnification
obligation was to arise, it could have a material adverse effect on the
business, results of operations and financial condition of the Company.

Certain amounts in the 2002 financial statements have been reclassified to
conform with the classifications in the 2003 financial statements with no
effect on previously reported net income or stockholders equity.

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Statements in this quarterly report which are not statements of historical fact
are forward-looking statements within the safe harbor provision of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are based on the information available to, and the expectations and
assumptions deemed reasonable by, the Company at the time the statements were
made. Because these forward-looking statements are subject to various risks
and uncertainties, actual results may differ materially from those projected in
the statements. These expectations, assumptions and uncertainties include the
Companys expectation of growth in the demand for electricity; belief that
legislation and regulations relating to the Clean Air Act and the relatively
higher costs of competing fuels will increase demand for its compliance and
low-sulfur coal; expectation that the Company will continue to have adequate
liquidity from its cash flow from operations, together with available
borrowings under its credit facilities, to finance the Companys working
capital needs and meet its debt reduction goals; a variety of market,
operational, geologic, permitting, labor and weather related factors and the
other risks and uncertainties which are described below under Contingencies
and Certain Trends and Uncertainties.

RESULTS OF OPERATIONS

Items Affecting Comparability of Reported Results

The comparison of our operating results for the quarter to date and year to
date periods ending September 30, 2003 and 2002 are affected by the following
significant items:

Three months ended

Nine months ended

September 30,

September 30,

2003

2002

2003

2002

(Dollar amounts in millions)

Operating Income

Severance tax recoveries

$

(0.8

)

$



$

2.5

$



Reversal of accounts receivable allowance

1.6

1.6

Reduction in workforce





(2.6

)



Gain from land sale

1.4



2.9



Gain from coal sales contract shortfall





1.4



Gain on contract buyout







5.6

Workers compensation premium adjustment







4.6

Net impact on operating income

2.2



5.8

10.2

Other

Expenses resulting from early debt
extinguishment and termination of hedge
accounting for interest rate swaps

(2.1

)



(6.9

)



Mark-to-market adjustments on interest
rate swaps that no longer qualify as
hedges

During the nine months ended September 30, 2003, the Company was notified by
the State of Wyoming of a favorable ruling as it relates to the Companys
calculation of coal severance taxes. The ruling resulted in a refund of
previously paid taxes and the reversal of previously accrued taxes payable.
During the three months ended September 30, 2003, the Company revised its
estimate of amounts it expects to ultimately collect based on additional
information obtained during such period.

Reversal of Accounts Receivable Allowance

During the three and nine months ended September 30, 2003, the Company
recognized income resulting from the collection of receivables which had
previously been estimated to be uncollectible and had been fully reserved in
prior periods.

Reduction in Workforce

During the nine months ending September 30, 2003, the Company instituted cost
reduction efforts throughout its operations. These cost reduction efforts
included the termination of approximately 100 employees at the Companys
corporate office and eastern mining operations. Of the expense recognized, $1.6
million was recognized as a component of cost of coal sales during the nine
months ended September 30, 2003, with the remainder recognized as a component
of selling, general and administrative expenses.

Gain from Land Sale

During the three and nine months ended September 30, 2003, the Company
recognized gains from land sales at one of its idle properties. These gains are
reported as other operating income.

Gain from Coal Sales Contract Shortfall

During the first nine months of 2003, the Company received $1.4 million from a
customer that did not meet its contractual purchase requirements.

Expenses resulting from early debt extinguishment and termination of hedge
accounting for interest rate swaps

On June 25, 2003, the Company repaid the term loans of its subsidiary, Arch
Western, with the proceeds from the offering of senior notes. In connection
with the repayment of the term loans, the Company recognized expenses related
to the write-off of loan fees and other debt extinguishment costs.
Additionally, the Company had designated certain interest rate swaps as hedges
of the variable rate interest payments due under the Arch Western term loans.
Pursuant to the requirements of Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities (FAS 133),
historical mark-to-market adjustments related to these swaps through June 25,
2003 were deferred as a component of Accumulated Other Comprehensive Loss.
Subsequent to the repayment of the term loans, these deferred amounts will be
amortized as additional expense over the contractual terms of the swap
agreements. For the quarter and nine months ending September 30, 2003, the
Company recognized expense of $2.1 million and $2.2 million, respectively,
related to the amortization of previously deferred mark-to-market adjustments.
The remainder of the expense recognized in the nine months ending September 30,
2003 represents early debt extinguishment costs.

Mark-To-Market Adjustments

The Company is a party to several interest rate swap agreements that were
entered into in order to hedge the variable rate interest payments due under
Arch Westerns term loans. Subsequent to the repayment of those term loans, the
swaps no longer qualify for hedge accounting under FASB Statement No. 133. As
such, changes in the market value of the swap agreements are recorded as a
component of income.

Gain on Contract Buyout

During the first nine months of 2002, the Company settled certain coal
contracts with a customer that was partially unwinding its coal supply position
and desired to buy out of the remaining terms of those contracts. The
settlements resulted in a pre-tax gain which was recognized in other operating
income in the Condensed Consolidated Statements of Operations.

During the nine months ended September 30, 2002, the Company received a
workers compensation premium adjustment refund from the State of West
Virginia. During 1998, the Company entered into the West Virginia workers
compensation plan at one of its subsidiary operations. The subsidiary paid
standard base rates until the West Virginia Division of Workers Compensation
could determine the actual rates based on claims experience. Upon review, the
Division of Workers Compensation refunded $4.6 million in premiums.

Coal sales revenues. The decline in coal sales revenues was attributable to the
12.1% reduction in tons sold, which was partially offset by an increase in the
average per ton realization. The increase in per ton realization was due to
higher contract prices on shipments made during the quarter ending September
30, 2003 as compared to the same period in 2002. The mix of sales between the
Companys eastern and western operations was not significantly different in the
two quarters.

Income from equity investments. Income from equity investments for the quarter
ended September 30, 2003 is comprised of $1.4 million from the Companys
investment in Canyon Fuel and $4.3 million from the Companys investment in
Natural Resource Partners (NRP). The Companys income from equity investments
for the quarter ended September 30, 2002 was solely from the Companys
investment in Canyon Fuel.

Other operating income. The decline in other operating income results primarily
from lower outlease royalty income in 2003 due to the contribution of reserves
and related outleases to NRP. This decline was partially offset by the gain on
the sale of land described above.

Cost of coal sales. The decrease in cost of coal sales is primarily
attributable
to lower sales volumes as described above. Cost of coal sales per ton sold
increased primarily due to increased costs of the Companys pension and
postretirement benefit plans of $7.6 million and to the impact of the Companys
fixed costs being spread over fewer tons. Additionally, costs for workers compensation were $1.5 million higher
in the quarter ended September 30, 2003 as compared to the same period in 2002, primarily related to the
Companys eastern operations.

Selling, general and administrative expenses. The increase in selling, general
and administrative expenses is primarily due to increased salary and benefit
costs of $2.2 million. This increase is primarily attributable to increased
costs related to the Companys postretirement and pension plans of $0.6 million
and to the Companys deferred compensation plans of $0.6 million.

Amortization of coal supply agreements. The decrease in amortization of coal
supply agreements is due primarily to a decrease in the coal supply agreements asset
balance. The decrease in the asset balance is primarily the result of a buyout
of a significant supply contract in the second quarter of 2003.

Other expenses. The decrease in other expenses is primarily a result of lower
costs to terminate certain contractual obligations for the purchase or sale of
coal as compared to the prior years period.

Interest Expense, Net

Three Months Ended

September 30,

Increase (Decrease)

(Dollar amounts in thousands)

2003

2002

$

%

Interest expense

$

13,187

$

13,425

$

(238

)

(1.8

%)

Interest income

(425

)

(217

)

(208

)

(95.9

%)

$

12,762

$

13,208

$

(446

)

(3.4

%)

Interest expense. Interest expense declined slightly due to the fact that average debt levels
were approximately 14% lower in the quarter ended September 30, 2003 as
compared to the same period in 2002. The impact of the lower debt levels was
reduced by higher effective interest rates in the quarter ended
September 30, 2003. During the quarter ended September 30, 2003, substantially
all of the Companys outstanding debt bore interest at a fixed rate of 6.75%.
During the quarter ended September 30, 2002, substantially all of the Companys
outstanding debt bore interest at a variable based on LIBOR. The LIBOR-based
rates in that period were lower than the fixed rate that the Companys debt
currently bears.

Amounts reported as non-operating consist of income or expense resulting from
the Companys financing activities other than interest. As described above, the
Companys results of operations for the quarter ended September 30, 2003
include expenses of $2.1 million related to the termination of hedge accounting
and resulting amortization of amounts that had previously been deferred.

Additionally, during the quarter ended September 30, 2003, the Company
recognized income of $10.6 million from mark-to-market adjustments for interest
rate swap agreements which no longer qualify for hedge accounting.

Income Taxes

Three Months Ended

September 30,

Increase (Decrease)

(Dollar amounts in thousands)

2003

2002

$

%

Benefit from income taxes

$

8,910

$

4,750

$

4,160

87.6

%

The Companys effective tax rate is sensitive to changes in estimates of annual
profitability and percentage depletion. The increase in the income tax benefit
recorded in the third quarter of 2003 as compared to the same period in 2002 is primarily the result of tax elections
made regarding reclamation costs at certain mines.

Net Income

Three Months Ended

September 30,

Increase (Decrease)

(Dollar amounts in thousands)

2003

2002

$

%

Net income (loss)

$

11,049

$

1,640

$

9,409

573.7

%

The increase in net income is primarily attributable to the mark-to-market
adjustments and increased income tax benefit, both of which are described
above.

Preferred Stock Dividends

On January 31, 2003, the Company utilized its Universal Shelf Registration
Statement and completed a public offering of 2,875,000 shares of 5% Perpetual
Cumulative Convertible Preferred Stock. Dividends on the preferred stock are
cumulative and are payable quarterly at the annual rate of 5% of the
liquidation preference. The Companys net income available to common
shareholders for the three months ending September 30, 2003 includes $1.8
million of preferred dividends.

Coal sales revenues. The decline in coal sales revenue is the result of a
decline in sales volumes. This decline was partially mitigated by higher
average sales prices. The increase in per ton coal sales realization is due to
higher contract pricing. The higher prices offset the impact of a change in the
sales mix between the Companys eastern and western operations. During the nine
months ended September 30, 2003, a greater percentage of the Companys sales
volumes were from its western operations, which have lower pricing than the
eastern operations.

Income from equity investments. Income from equity investments for the nine
months ended September 30, 2003 is comprised of $17.6 million of income from
the Companys investment in Canyon Fuel, and $11.3 million from the Companys
investment in NRP. Income from equity investments for the first nine months of
2002 is comprised solely of income from the Companys investment in Canyon
Fuel. The improved results from Canyon Fuel are due primarily to improved
operating margins, as reduced operating costs more than offset slightly lower
realizations.

Other operating income. The decrease in other operating income is due primarily
to lower outlease royalty income resulting from the contribution of reserves
and the related leases to NRP. The royalty income recorded by the Company in
the nine months ended September 30, 2003 was approximately $6.4 million lower
than that reported in the same period in 2002. This decline was partially
offset by the gains on the sale of land described above.

Cost of coal sales. Cost of coal sales was relatively unchanged despite a
decrease in coal sales due primarily to increased costs related to the
Companys pension and postretirement medical plans of $25.8 million.
Additionally, the Company experienced higher costs due to disruptions in
production resulting from severe weather in February and March 2003 at certain
of its operations and to higher prices for operating supplies, including diesel
fuel and explosives.

Selling, general and administrative expenses. The increase in selling, general
and administrative expenses is due primarily to higher salary and benefit costs
of approximately $5.5 million, including the costs of the reduction in
workforce described above.

Other expenses. The decrease in other expenses is primarily a result of lower
costs to terminate certain contractual obligations for the purchase or sale of
coal as compared to the prior years period.

Interest Expense, Net

Nine Months Ended

September 30,

Increase (Decrease)

(Dollar amounts in thousands)

2003

2002

$

%

Interest expense

$

36,407

$

39,783

$

(3,376

)

(8.5

%)

Interest income

(1,251

)

(799

)

(452

)

(56.6

%)

$

35,156

$

38,984

$

(3,828

)

(9.8

%)

Interest expense. The decrease in interest expense is primarily attributable to
a decrease in outstanding borrowings during the nine months ended September 30,
2003 as compared to the same period in 2002.

Other Non-operating Income and Expense

Amounts reported as non-operating consist of income or expense
resulting from the Companys financing activities other than interest. As
described above, the Companys results of operations for the nine months ended
September 30, 2003 include expenses of $4.7 million related to debt
extinguishment costs and $2.2 million related to the termination of hedge
accounting and resulting amortization of amounts that had previously been
deferred.

Additionally, during the nine months ended September 30, 2003, the Company
recognized income of $11.6 million from mark-to-market adjustments for interest
rate swap agreements which no longer qualify for hedge accounting.

Income Taxes

Nine Months Ended

September 30,

Increase (Decrease)

(Dollar amounts in thousands)

2003

2002

$

%

Benefit from income taxes

$

17,510

$

14,250

$

3,260

22.9

%

The Companys effective tax rate is sensitive to changes in estimates of annual
profitability and percentage depletion. The increase in the income tax benefit
for the first nine months of 2003 as compared to the same period in 2002 is
primarily the result of tax elections made regarding reclamation costs at
certain mines.

The net loss for the nine months ended September 30, 2003 is comparable to that for
the period ended September 30, 2002 as a decline in operating income was offset
by the mark-to-market gains and increased tax benefit described above.

Cumulative Effect of Accounting Change

Effective January 1, 2003, the Company adopted Statement of Financial
Accounting Standards No. 143, Accounting for Asset Retirement Obligations (FAS
143). FAS 143 requires legal obligations associated with the retirement of
long-lived assets to be recognized at fair value at the time obligations are
incurred. Upon initial recognition of a liability, that cost should be
capitalized as part of the related long-lived asset and allocated to expense
over the useful life of the asset. Application of FAS 143 resulted in a
cumulative effect loss as of January 1, 2003 of $3.7 million, net of tax.

Preferred Stock Dividends

On January 31, 2003, the Company utilized its Universal Shelf Registration
Statement and completed a public offering of 2,875,000 shares of 5% Perpetual
Cumulative Convertible Preferred Stock. Dividends on the preferred stock are
cumulative and are payable quarterly at the annual rate of 5% of the
liquidation preference. The Companys net loss available to common shareholders
for the nine months ending September 30, 2003 includes $4.8 million of
preferred dividends.

DISCLOSURE CONTROLS

An evaluation was performed under the supervision and with the participation of
the Companys management, including the CEO and CFO, of the effectiveness of
the design and operation of the Companys disclosure controls and procedures as
of September 30, 2003. Based on that evaluation, the Companys management,
including the CEO and CFO, concluded that the Companys disclosure controls and
procedures were effective as of such date. There have been no significant
changes in the Companys internal controls or in other factors that could
significantly affect internal controls subsequent to September 30, 2003.

OUTLOOK

Vulcan Acquisition. On May 29, 2003, the Company entered into a definitive
agreement to acquire (1) Vulcan Coal Holdings, L.L.C. (Vulcan), which owns
all of the common equity of Triton Coal Company, LLC (Triton), and (2) all of
the preferred units of Triton, for an aggregate purchase price of $364.0
million, subject to working capital adjustments. Consummation of the
transaction is subject to various conditions, including the receipt by the
Company and Vulcan of all necessary governmental and regulatory consents and
other customary conditions. The Company intends to finance the acquisition
with cash, borrowings under its existing revolving credit facility and a $100
million term loan at its Arch Western subsidiary.

Triton is the nations seventh largest coal producer and the operator of two
mines in the Powder River Basin. These mines, North Rochelle and Buckskin,
produced a combined total of 42.2 million tons of coal in 2002 and are
supported by approximately 744 million tons of proven and probable reserves.
The North Rochelle mine produces 8,800 Btu super-compliance quality coal on a
reserve base of approximately 250 million tons. In 2002, North
Rochelle produced 23.9 million tons of coal. The Buckskin mine produces 8,400
Btu compliance quality coal on a reserve base of approximately 494 million
tons. In 2002, Buckskin produced 18.3 million tons of coal.

The acquisition of Triton will increase the Companys total reserves in the
Powder River Basin by approximately 50%, from 1.6 billion tons to 2.3 billion
tons. North Rochelle and Black Thunder are contiguously located, sharing a
5.5-mile property line. The Company has identified expected synergies, based
on Tritons 2002 earnings, of approximately $18 million to $22 million annually
that may be realized through the operational integration of Tritons North
Rochelle mine and the Black Thunder mine.

Production Levels. The Company reduced its overall rate of coal production by
approximately 6% during the first nine months of 2003 as compared to the same
period in 2002. This was in addition to a reduction in overall production of
approximately 5% during 2002. These actions were taken in response to
unfavorable spot coal markets following an extremely mild winter in 2001-2002,
a period of industrial economic weakness that dampened electricity demand and
an effort by electric utilities to reduce coal stockpile levels. Although the
timing of any recovery in coal markets remains uncertain, there have been
indications that prices may return to more favorable levels in the future.
These indications include more normal weather patterns over much of the
country, some indication of economic recovery and an overall decrease in coal
production and utility stockpiles.

The Companys 65% owned Canyon
Fuel subsidiary previously announced that its Skyline mine is
scheduled to be idled by June 20, 2004. The Skyline mine produced 2.2
million tons of coal in the first nine months of 2003 and
contributed $5.6 million to the Companys operating income in
the first nine months of 2003. Canyon Fuel anticipates increasing
production from its other two mines to make up a portion of the
scheduled production decrease associated with the idling.

Postretirement Obligations. The Company expects to incur significantly higher
expenses related to its postretirement health care obligations in 2003. These
obligations, coupled with a much smaller increase in pension-related expenses,
increased costs by $8.2 million and $26.0 million during the third quarter and
first nine months of 2003, respectively, and are expected to increase non-cash
costs by approximately $8.0 million in the fourth quarter as compared to prior
year levels.

Expenses Related to Interest Rate Swaps. The Company had designated certain
interest rate swaps as hedges of the variable rate interest payments due under
Arch Westerns term loans. Pursuant to the requirements of FASB Statement No.
133, historical mark-to-market adjustments related to these swaps through June
25, 2003 of $27.0 million (net of tax) were deferred as a component of
Accumulated Other Comprehensive Loss. Subsequent to the repayment of the term
loans, these deferred amounts will be amortized as additional expense over the
original contractual terms of the swap agreements. As of September 30, 2003,
the remaining deferred amounts will be recognized as expense in the following
periods: $2.1 million in the fourth quarter of 2003; $8.3 million in 2004; $7.7
million in 2005; $4.8 million in 2006; and $1.9 million in 2007. Future
mark-to-market adjustments for these interest rate swaps will be recognized as income or expense as
appropriate.

Permitting Issues. The Company idled its Dal-Tex operation on July 23, 1999 as
a result of an adverse ruling in litigation on the issue of valley fills. This
ruling was later reversed on appeal; however, the Company has not yet completed
the process necessary to obtain the required permits for the mines surface
operations. Once the Company obtains the necessary permits, it intends to open
a surface operation at the mine, subject to then-existing market conditions.

Chief Objectives. The Company continues to focus on taking steps to increase
shareholder returns by improving earnings, strengthening cash generation, and
improving productivity at its large-scale mines, while building on its leading
position in its target coal-producing basins, the Powder River Basin and the
Central Appalachian Basin. In addition, the Company is aggressively pursuing
savings in both overhead and operating costs. The Company instituted personnel
cutbacks at its corporate headquarters and Eastern operations in the first half
of 2003 and recently initiated a cost reduction effort targeting key cost
drivers at each of its captive mines.

The following is a summary of cash provided by or used in each of the indicated
types of activities during the nine months ended September 30, 2003 and 2002:

2003

2002

(in thousands)

Cash provided by (used in):

Operating activities

$

114,256

$

129,749

Investing activities

(61,547

)

(136,849

)

Financing activities

63,285

9,423

Cash provided by operating activities declined due primarily to lower operating
income in the nine months ended September 30, 2003 as compared to the nine
months ended September 30, 2002.

Cash used in investing activities during the nine months ended September 30,
2003 was lower than the same period in 2002 due to the receipt of $52.5 million
from the buyout of a coal supply contract with above-market pricing.
Additionally, capital expenditures were reduced in the first nine months of
2003 as compared to the same period in 2002 due to the Companys decision to
better match its capital expenditures to the weak coal markets during this
time. During the first nine months of 2002 and 2003, the Company made the
fourth and fifth, respectively, of five annual payments under the Thundercloud
federal lease, which is mined by the Black Thunder mine in Wyoming.

Cash provided by financing activities during the first three quarters of 2003
reflects the proceeds from the issuance of the Arch Western senior notes (which
were used to retire existing debt) and the proceeds from the sale of preferred
stock. On January 31, 2003, the Company utilized its Universal Shelf and
completed the sale of 2,875,000 shares of its 5% Perpetual Cumulative
Convertible Preferred Stock. The net proceeds from the offering of
approximately $139.0 million were used to reduce indebtedness under the
Companys revolving credit facility and for working capital and general
corporate purposes, including potential acquisitions. On June 25, 2003, Arch
Western Finance, LLC, a subsidiary of Arch Western, completed the offering of
$700 million of 6.75% senior notes. The proceeds of the offering were primarily
used to repay Arch Westerns existing term loans. The cash provided by
financing activities during the nine months ended September 30, 2002 reflects
borrowings under the Companys revolver and line of credit to fund capital
expenditures.

The Company generally satisfies its working capital requirements and funds its
capital expenditures and debt-service obligations with cash generated from
operations. The Company believes that cash generated from operations and its
borrowing capacity will be sufficient to meet its working capital requirements,
anticipated capital expenditures and scheduled debt payments for at least the
next several years. The Companys ability to satisfy debt service obligations,
to fund planned capital expenditures, to make acquisitions and to pay dividends
will depend upon its future operating performance, which will be affected by
prevailing economic conditions in the coal industry and financial, business and
other factors, some of which are beyond the Companys control.

Expenditures for property, plant and equipment were $91.7 million for the nine
months ended September 30, 2003, compared to $117.4 million for the nine months
ended September 30, 2002. Capital expenditures are made to improve and replace
existing mining equipment, expand existing mines, develop new mines and improve
the overall efficiency of mining operations. It is anticipated that future
capital expenditures will be funded by available cash and existing credit
facilities.

At September 30, 2003, the Company had $44.5 million in letters of credit
outstanding, which resulted in $305.5 million of unused capacity under the
Companys revolving credit facility. Sufficient unused capacity is currently
available to fund all operating needs. Financial covenant requirements may
restrict the amount of unused capacity available to the Company for borrowing
and letters of credit.

Financial covenants contained in the Companys revolving credit facility
consist of a maximum leverage ratio, a minimum fixed charge coverage ratio and
a minimum net worth test. The leverage ratio requires that the Company

not
permit the ratio of total indebtedness at the end of any calendar quarter to
adjusted EBITDA (as defined in the agreement) for the four quarters then ended
to exceed a specified amount. The fixed charge coverage ratio requires that
the Company not permit the ratio of the Companys adjusted EBITDA plus lease
expense to interest expense plus lease expense for the four quarters then ended
to be less than a specified amount. The net worth test requires that the
Company not permit its net worth to be less than a specified amount plus 50% of
cumulative net income.

On June 25, 2003, Arch Western Finance LLC, a subsidiary of Arch Western,
completed the offering of $700 million of senior notes and utilized the
proceeds of the offering to repay Arch Westerns existing term loans. The
senior notes bear a fixed rate of interest of 6.75% and are due in full on July
1, 2013. Interest on the senior notes is payable on January 1 and July 1 each
year commencing January 1, 2004. The senior notes are guaranteed by Arch
Western and certain of Arch Westerns subsidiaries and are secured by a
security interest in loans made to Arch Coal by Arch Western. The terms of the
senior notes contain restrictive covenants that limit Arch Westerns ability
to, among other things, incur additional debt, sell or transfer assets, and
make investments.

On September 19, 2003, Arch Western established a new term loan facility that
provides for a $100 million term loan. The facility is subject to certain
conditions of borrowing, including the consummation of the Companys
acquisition of Vulcan. Currently, no amount is available to the Company under
the facility. If Arch Western borrows pursuant to the terms of the facility,
the term loan will be due in quarterly installments from October 2004 through
April 2007.

The Company periodically establishes uncommitted lines of credit with banks.
These agreements generally provide for short-term borrowings at market rates.
At September 30, 2003, there were $20.0 million of such agreements in effect,
of which none were outstanding. The Company can also issue an additional
$311.8 million in public debt and equity securities under a shelf registration
statement.

The Company is exposed to market risk associated with interest rates due to its
existing level of indebtedness. At September 30, 2003, substantially all of
the Companys outstanding debt bore interest at fixed rates.

Additionally, the Company is exposed to market risk associated with interest
rates resulting from its interest rate swap positions. Prior to the June 25,
2003 Arch Western senior notes offering and subsequent repayment of Arch
Westerns term loans, the Company utilized interest rate swap agreements to
convert the variable-rate interest payments due under the term loans and the
Companys revolving credit facility to fixed-rate payments. As of June 25,
2003, the Company was a party to interest rate swap agreements having a total
notional value of $525.0 million. During the quarter ended September 30, 2003,
the Company entered into the following transactions impacting its interest rate
swap position:



Terminated swaps with a notional value of $150.0 million by paying
$2.9 million to the swap counterparties.



Entered into offsetting swap positions with a total notional value
of $150.0 million. Under these offsetting positions, the Company pays a
variable rate based on LIBOR and receives a fixed rate. The variable
rate, reset dates and maturities of the offsetting swaps match those of
certain of the Companys original swap positions. As such, variable
amounts paid pursuant to these offsetting positions will equal the
variable amounts received under the original swap positions.

After taking into consideration these transactions, as of September 30, 2003,
the Companys net interest rate swap position is as follows:



Swaps with a notional value of $25.0 million which are designated
as hedges of future interest payments to be made under the Companys
revolving credit facility. Under these swaps, the Company pays a fixed
rate of 5.96% (before the credit spread over LIBOR) and receives a
variable rate based upon 30-day LIBOR. The remaining term of the swap
agreements at September 30, 2003 was 44 months.

Swaps with a notional value of $200.0 million which are not
designated as hedges and for which the Company has not entered
offsetting positions. Under these swaps, the Company pays a weighted
average fixed rate of 4.78% (before the credit spread over LIBOR) and
receives a weighted average variable rate based upon 30-day and 90-day
LIBOR. The remaining terms of the swap agreements at September 30, 2003
ranged from 23 to 46 months.



Swaps with a total notional value of $300.0 million consisting of
offsetting positions of $150.0 million each. Because of the offsetting
nature of these positions, the Company is not exposed to market
interest rate risk related to these swaps. Under these swaps, the
Company pays a weighted average fixed rate of 5.61% on $150.0 million of
notional value and receives a weighted average fixed rate of 2.68% on
$150.0 million of notional value. The remaining terms of these swap
agreements at September 30, 2003 ranged from 23 to 46 months.

As of September 30, 2003, the fair value of the Companys net interest rate
swap position was a liability of $30.2 million.

The Company is also exposed to commodity price risk related to its purchase of
diesel fuel. The Company enters into heating oil swaps and forward purchase
contracts to substantially reduce volatility in the price of diesel fuel
purchased for its operations. The swap agreements essentially fix the price
paid for diesel fuel by requiring the Company to pay a fixed heating oil price
and receive a floating heating oil price.

The discussion below presents the sensitivity of the market value of the
Companys financial instruments to selected changes in market rates and prices.
The range of changes reflects the Companys view of changes that are reasonably
possible over a one-year period. Market values are the present value of
projected future cash flows based on the market rates and prices chosen. The
major accounting policies for these instruments are described in Note 1 to the
consolidated financial statements of the Company as of and for the year ended
December 31, 2002 as filed on its Annual Report on Form 10-K with the
Securities and Exchange Commission.

At September 30, 2003, the Companys debt portfolio consists substantially of
fixed rate debt. A change in interest rates on the fixed rate debt impacts the
net financial instrument position but has no impact on interest incurred or
cash flows. The sensitivity analysis related to the Companys fixed rate debt
assumes an instantaneous 100-basis-point move in interest rates from their
levels at September 30, 2003, with all other variables held constant. A
100-basis-point increase in market interest rates would result in a $47.4
million decrease in the fair value of the Companys fixed rate debt at
September 30, 2003.

As it relates to the Companys interest rate swap positions, a change in
interest rates impacts the net financial instrument position. Additionally,
because most of the swaps no longer qualify for hedge accounting, changes in
the net financial instrument position of these swaps will directly impact the
Companys earnings. A 100-basis point increase in market interest rates would
result in a $6.4 million decrease in the fair value of the Companys liability
under the interest rate swap positions at September 30, 2003, of which $5.5
million would be recognized as income.

Similarly, relative to the Companys diesel hedge position, at September 30,
2003, a $.05 per gallon decrease in the price of heating oil would not have a
material impact on the fair value of the financial position of the heating oil
swap.

The federal Surface Mining Control and Reclamation Act of 1977 (SMCRA) and
similar state statutes require that mine property be restored in accordance
with specified standards and an approved reclamation plan. The Company accrues
for the costs of final mine closure reclamation in accordance with the
provisions of FAS 143, which was adopted as of January 1, 2003. These costs
relate to reclaiming the pit and support acreage at surface mines and sealing
portals at deep mines. Other costs of final mine closure common to surface and
underground mining are related to reclaiming refuse and slurry ponds,
eliminating sedimentation and drainage control structures, and dismantling or
demolishing equipment or buildings used in mining operations. The establishment
of the final mine closure reclamation liability is based upon permit
requirements and requires various estimates and assumptions, principally
associated with costs and productivities.

The Company reviews its entire environmental liability periodically and makes
necessary adjustments, including permit changes and revisions to costs and
productivities to reflect current experience. The Companys management believes
it is making adequate provisions for all expected reclamation and other
associated costs.

Legal Contingencies

Permit Litigation Matters. A group of local and national environmental
organizations filed suit against the U.S. Army Corps of Engineers in the U.S.
District Court in Huntington, West Virginia on October 23, 2003. In its
complaint, Ohio Valley Environmental Coalition, et al v. Bullen, et al, the
plaintiffs allege that the Corps has violated its statutory duties arising
under the Clean Water Act, the Administrative Procedure Act and the National
Environmental Policy Act in issuing the Nationwide 21 (NWP 21) general permit.
The plaintiffs allege that the procedural requirements of the three federal
statutes identified in their complaint have been violated, and that the Corps
may not utilize the mechanism of a nationwide permit to authorize valley fills.
Among specific fills identified in the complaint as not meeting the
requirements of the NWP 21 are valley fills associated with several of the
Companys operating subsidiaries. If the plaintiffs prevail in this
litigation, it may delay the Companys receipt of these permits.

A separate matter involves a surface mining permit issued by the West Virginia
Department of Environmental Protection (DEP) to the Companys Coal-Mac
subsidiary on September 29, 2003. This permit has been challenged in an
administrative proceeding brought by the West Virginia Highlands Conservancy.
The appeal alleges that the permit is incomplete and inaccurate, and thereby
not in compliance with the DEPs regulations. Specifically, the petition
alleges that the proposal to construct a valley fill is inconsistent with a
provision of the state regulations known as the buffer zone rule, that the
operation has failed to provide for suitable topsoil material for use in its
reclamation, and that the state agency failed to evaluate the consequences to
the water quality from the alleged discharge of one substance from the mine
site. The DEP is required by state law to defend the issuance of the permit.
The company has filed a notice to intervene in the proceeding. While the
outcome of this litigation is subject to various uncertainties, the Company
believes that the permit was validly issued.

West Virginia Flooding Litigation. The Company and three of its subsidiaries
have been named, among others, in 17 separate complaints filed in the West
Virginia Counties of: Wyoming, McDowell, Fayette, Upshur, Kanawha, Raleigh,
Boone and Mercer. These cases collectively include approximately 1,780
plaintiffs who are seeking damages for property damage and personal injuries
arising out of flooding that occurred in southern West Virginia in July 2001.
The plaintiffs have sued coal, timber, railroad and land companies under the
theory that mining, construction of haul roads and removal of timber caused
natural surface waters to be diverted in an unnatural way, thereby causing
damage to the plaintiffs. The West Virginia Supreme Court has ruled that these
cases, along with several additional flood damage cases not involving the
Companys subsidiaries, be handled pursuant to the Courts Mass Litigation
rules. As a result of this ruling, the cases have been transferred to the
Circuit Court of Raleigh County in West Virginia to be handled by a panel
consisting of three circuit court judges, which has certified certain legal
issues back to the West Virginia Supreme Court. Upon resolution of the legal
issues by the West Virginia Supreme Court, the panel will, among other things,
determine whether the individual cases should be consolidated or returned to
their original circuit courts.

While the outcome of this litigation is subject to uncertainties, based on the
Companys preliminary evaluation of the issues and the potential impact on it,
the Company believes this matter will be resolved without a material adverse
effect on its financial condition or results of operations.

The Company is a party to numerous other claims and lawsuits with respect to
various matters. The Company provides for costs related to contingencies,
including environmental matters, when a loss is probable and the amount is
reasonably determinable. After conferring with counsel, it is the opinion of
management that the ultimate resolution of these claims, to the extent not
previously provided for, will not have a material adverse effect on the
consolidated financial condition, results of operations or liquidity of the
Company.

CERTAIN TRENDS AND UNCERTAINTIES

Substantial Leverage  Covenants

As of September 30, 2003, the Company had outstanding consolidated indebtedness
of $700.1 million, representing approximately 52% of the Companys capital
employed. Despite making substantial progress in reducing debt, the Company
continues to have significant debt service obligations, and the terms of its
credit agreements limit its flexibility and result in a number of limitations
on the Company. The Company also has significant lease and royalty obligations.
The Companys ability to satisfy debt service, lease and royalty obligations
and to effect any refinancing of its indebtedness will depend upon future
operating performance, which will be affected by prevailing economic conditions
in the markets that the Company serves as well as financial, business and other
factors, many of which are beyond the Companys control. The Company may be
unable to generate sufficient cash flow from operations and future borrowings,
or other financings may be unavailable in an amount sufficient to enable it to
fund its debt service, lease and royalty payment obligations or its other
liquidity needs.

The Companys relative amount of debt and the terms of its credit agreements
could have material consequences to its business, including, but not limited
to: (i) making it more difficult to satisfy debt covenants and debt service,
lease payment and other obligations; (ii) making it more difficult to pay
quarterly dividends as the Company has in the past; (iii) increasing the
Companys vulnerability to general adverse economic and industry conditions;
(iv) limiting the Companys ability to obtain additional financing to fund
future acquisitions, working capital, capital expenditures or other general
corporate requirements; (v) reducing the availability of cash flows from
operations to fund acquisitions, working capital, capital expenditures or other
general corporate purposes; (vi) limiting the Companys flexibility in planning
for, or reacting to, changes in the Companys business and the industry in
which the Company competes; or (vii) placing the Company at a competitive
disadvantage when compared to competitors with less relative amounts of debt.

Terms of the Companys credit facilities and leases contain financial and other
covenants that create limitations on the Companys ability to, among other
things, effect acquisitions or dispositions and borrow additional funds, and
require the Company to, among other things, maintain various financial ratios
and comply with various other financial covenants. Failure by the Company to
comply with such covenants could result in an event of default under these
agreements which, if not cured or waived, would enable the Companys lenders to
declare amounts borrowed due and payable, or otherwise result in unanticipated
costs.

Losses

The Company reported a net loss available to common shareholders of $2.6
million for the year ended December 31, 2002 and $12.0 million in the first
nine months of 2003. These losses are primarily attributable to the Companys
decision to scale back production during the period in response to a weak
market environment and increased costs at certain Company operations. The
decision to scale back production came after the Company had prepared most of
the operations to maximize production in order to capitalize on higher market
prices for coal the Company had previously projected. Therefore, certain costs
incurred to maximize production did not result in higher revenues but did
increase the cost of coal sales.

Because the coal mining industry is subject to significant regulatory oversight
and affected by the possibility of adverse pricing trends or other industry
trends beyond the Companys control, the Company may suffer losses in the

In addition, the electric generating industry, which is the most significant
end-user of coal, is subject to extensive regulation regarding the
environmental impact of its power generation activities, which could affect
demand for the Companys coal. The possibility exists that new legislation or
regulations may be adopted or that the enforcement of existing laws could
become more stringent, either of which may have a significant impact on the
Companys mining operations or its customers ability to use coal and may
require the Company or its customers to change operations significantly or
incur substantial costs.

While it is not possible to quantify the expenditures incurred by the Company
to maintain compliance with all applicable federal and state laws, those costs
have been and are expected to continue to be significant. The Company posts
performance bonds pursuant to federal and state mining laws and regulations for
the estimated costs of reclamation and mine closing, including the cost of
treating mine water discharge when necessary. Compliance with these laws has
substantially increased the cost of coal mining for all domestic coal
producers.

Clean Air Act. The federal Clean Air Act and similar state and local laws,
which regulate emissions into the air, affect coal mining and processing
operations primarily through permitting and emissions control requirements. The
Clean Air Act also indirectly affects coal mining operations by extensively
regulating the emissions from coal-
fired industrial boilers and power plants, which are the largest end-users of
the Companys coal. These regulations can take a variety of forms, as explained
below.

The Clean Air Act imposes obligations on the Environmental Protection Agency,
or EPA, and the states to implement regulatory programs that will lead to the
attainment and maintenance of EPA-promulgated ambient air quality standards,
including standards for sulfur dioxide, particulate matter, nitrogen oxides and
ozone. Owners of coal-fired power plants and industrial boilers have been
required to expend considerable resources in an effort to comply with these
ambient air standards. Significant additional emissions control expenditures
will be needed in order to meet the current national ambient air standard for
ozone. In particular, coal-fired power plants will be affected by state
regulations designed to achieve attainment of the ambient air quality standard
for ozone. Ozone is produced by the combination of two precursor pollutants:
volatile organic compounds and nitrogen oxides. Nitrogen oxides are a
by-product of coal combustion. Accordingly, emissions control requirements for
new and expanded coal-fired power plants and industrial boilers will continue
to become more demanding in the years ahead.

In July 1997, the EPA adopted more stringent ambient air quality standards for
particulate matter and ozone. In a February 2001 decision, the U.S. Supreme
Court largely upheld the EPAs position, although it remanded the EPAs ozone
implementation policy for further consideration. On remand, the Court of
Appeals for the D.C. Circuit affirmed the EPAs adoption of these more
stringent ambient air quality standards. As a result of the finalization of
these standards, states that are not in attainment for these standards will
have to revise their State Implementation Plans to include provisions for the
control of ozone precursors and/or particulate matter. Revised State
Implementation Plans could require electric power generators to further reduce
nitrogen oxide and particulate matter emissions. The potential need to achieve
such emissions reductions could result in reduced coal consumption by electric
power generators. Thus, future regulations regarding ozone, particulate matter
and other pollutants could restrict the market for coal and the development of
new mines by the Company. This in turn may result in decreased production by
the Company and a corresponding decrease in the Companys revenues. Although
the future scope of these ozone and particulate matter regulations cannot be
predicted, future regulations regarding these and other ambient air standards
could restrict the market for coal and the development of new mines.

Furthermore, in October 1998, the EPA finalized a rule that will require 19
states in the Eastern United States that have ambient air quality problems to
make substantial reductions in nitrogen oxide emissions by the year 2004. To
achieve these reductions, many power plants would be required to install
additional control measures. The installation of these measures would make it
more costly to operate coal-fired power plants and, depending on the
requirements of individual state implementation plans, could make coal a less
attractive fuel.

Along with these regulations addressing ambient air quality, the EPA has
initiated a regional haze program designed to protect and to improve visibility
at and around National Parks, National Wilderness Areas and International
Parks. This program restricts the construction of new coal-fired power plants
whose operation may impair visibility at and around federally protected areas.
Moreover, this program may require certain existing coal-fired power plants to
install additional control measures designed to limit haze-causing emissions,
such as sulfur dioxide, nitrogen oxides and particulate matter. By imposing
limitations upon the placement and construction of new coal-fired power plants,
the EPAs regional haze program could affect the future market for coal.

Additionally, the U.S. Department of Justice, on behalf of the EPA, has filed
lawsuits against eight investor-owned electric utilities and brought an
administrative action against one government-owned electric utility for alleged
violations of the Clean Air Act. The EPA claims that these utilities have
failed to obtain New Source Review permits required under the Clean Air Act for
alleged major modifications to their power plants. The suit against the
government-owned utility was dismissed by a federal court of appeal in June.
The enforcement cases against six of the investor-owned utilities continue, The
Company supplies coal to some of the currently affected utilities. These
lawsuits could require the utilities to pay penalties and install pollution
control equipment or undertake other emission reduction measures, which could
adversely impact their demand for coal.

New regulations governing New Source Review were announced by EPA in October.
In addition, EPA has indicated that it would discontinue investigations of
additional power plants owned by other utilities commenced
under the old regulations. The attorneys general of several Northeastern and
Mid Atlantic states, however, may commence legal actions against those same
utilities.

Other Clean Air Act programs are also applicable to power plants that use the
Companys coal. For example, the acid rain control provisions of Title IV of
the Clean Air Act require a reduction of sulfur dioxide emissions from power

plants. Because sulfur is a natural component of coal, required sulfur dioxide
reductions can affect coal mining operations. Title IV imposes a two phase
approach to the implementation of required sulfur dioxide emissions reductions.
Phase I, which became effective in 1995, regulated the sulfur dioxide emissions
levels from 261 generating units at 110 power plants and targeted the highest
sulfur dioxide emitters. Phase II, implemented January 1, 2000, made the
regulations more stringent and extended them to additional power plants,
including all power plants of greater than 25 megawatt capacity. Affected
electric utilities can comply with these requirements by:

installing pollution control devices such as scrubbers, which reduce the emissions from high sulfur coal;



reducing electricity generating levels; or



purchasing or trading emissions credits.

Specific emissions sources receive these credits, which electric utilities and
industrial concerns can trade or sell to allow other units to emit higher
levels of sulfur dioxide. Each credit allows its holder to emit one ton of
sulfur dioxide.

In addition to emissions control requirements designed to control acid rain and
to attain the national ambient air quality standards, the Clean Air Act also
imposes standards on sources of hazardous air pollutants. Although these
standards have not yet been extended to coal mining operations, the EPA
recently announced that it will regulate hazardous air pollutants from
coal-fired power plants. Under the Clean Air Act, coal-fired power plants will
be required to control hazardous air pollution emissions by no later than 2009.
These controls are likely to require significant new improvements in controls
by power plant owners. The most prominently targeted pollutant is mercury,
although other by-products of coal combustion may be covered by future
hazardous air pollutant standards for coal combustion sources.

Other proposed initiatives may have an effect upon coal operations. One such
proposal is the Bush Administrations recently announced Clear Skies
Initiative. As proposed, this initiative is designed to reduce emissions of
sulfur dioxide, nitrogen oxides, and mercury from power plants. Other so-called
multi-pollutant bills, which could regulate additional air pollutants, have
been proposed by various members of Congress. While the details of all of these
proposed initiatives vary, there appears to be a movement towards increased
regulation of a number of air pollutants. Were such initiatives enacted into
law, power plants could choose to shift away from coal as a fuel source to meet
these requirements.

Mine Health and Safety Laws. Stringent safety and health standards have been
imposed by federal legislation since the adoption of the Mine Safety and Health
Act of 1969. The Mine Safety and Health Act of 1977, which significantly
expanded the enforcement of health and safety standards of the Mine Safety and
Health Act of 1969, imposes comprehensive safety and health standards on all
mining operations. In addition, as part of the Mine Safety and Health Acts of
1969 and 1977, the Black Lung Act requires payments of benefits by all
businesses conducting current mining operations to coal miners with black lung
and to some survivors of a miner who dies from this disease.

Surface Mining Control and Reclamation Act. SMCRA establishes operational,
reclamation and closure standards for all aspects of surface mining as well as
many aspects of deep mining. SMCRA requires that comprehensive environmental
protection and reclamation standards be met during the course of and upon
completion of mining activities. In conjunction with mining the property, the
Company is contractually obligated under the terms of its
leases to comply with all laws, including SMCRA and equivalent state and local
laws. These obligations include reclaiming and restoring the mined areas by
grading, shaping, preparing the soil for seeding and by seeding with grasses or
planting trees for use as pasture or timberland, as specified in the approved
reclamation plan.

SMCRA also requires the Company to submit a bond or otherwise financially
secure the performance of its reclamation obligations. The earliest a
reclamation bond can be completely released is five years after reclamation has
been achieved. Federal law and some states impose on mine operators the
responsibility for repairing the

property or compensating the property owners
for damage occurring on the surface of the property as a result of mine
subsidence, a consequence of longwall mining and possibly other mining
operations. In addition, the Abandoned Mine Lands Act, which is part of SMCRA,
imposes a tax on all current mining operations, the proceeds of which are used
to restore mines closed before 1977. The maximum tax is $0.35 per ton of coal
produced from surface mines and $0.15 per ton of coal produced from underground
mines.

The Company also leases some of its coal reserves to third party operators.
Under SMCRA, responsibility for unabated violations, unpaid civil penalties and
unpaid reclamation fees of independent mine lessees and other third parties
could potentially be imputed to other companies that are deemed, according to
the regulations, to have owned or controlled the mine operator. Sanctions
against the owner or controller are quite severe and can include civil
penalties, reclamation fees and reclamation costs. The Company is not aware of
any currently pending or asserted claims against it asserting that it owns or
controls any of its lessees operations.

Framework Convention on Global Climate Change. The United States and more than
160 other nations are signatories to the 1992 Framework Convention on Global
Climate Change, commonly known as the Kyoto Protocol, that is intended to limit
or capture emissions of greenhouse gases such as carbon dioxide and methane.
The U.S. Senate has neither ratified the treaty commitments, which would
mandate a reduction in U.S. greenhouse gas emissions, nor enacted any law
specifically controlling greenhouse gas emissions and the Bush Administration
has withdrawn support for this treaty. Nonetheless, future regulation of
greenhouse gases could occur either pursuant to future U.S. treaty obligations
or pursuant to statutory or regulatory changes under the Clean Air Act. Efforts
to control greenhouse gas emissions could result in reduced demand for coal if
electric power generators switch to lower carbon sources of fuel.

West Virginia Antidegradation Policy. In January 2002, the Ohio Valley
Environmental Coalition and other groups and individuals filed suit in the U.S.
District Court for the Southern District of West Virginia against the U.S. EPA
to challenge the agencys approval of West Virginias antidegradation
implementation policy. Under the federal Clean Water Act, state regulatory
authorities must conduct an antidegradation review before approving permits for
the discharge of pollutants to waters that have been designated as high quality
by the state. Antidegradation review involves public and intergovernmental
scrutiny of permits and requires permittees to demonstrate that the proposed
activities are justified in order to accommodate significant economic or social
development in the area where the waters are located. On August 29, 2003 the
district court ruled in this lawsuit, Ohio Valley Environmental Coalition v.
Horinko, and remanded seven provisions in West Virginias antidegradation
implementation policy that exempt current holders of National Pollutant
Discharge Elimination System (NPDES) permits and Section 404 permits, among
other parties, from the antidegradation review process. Six other provisions of
the policy were upheld. The Company was exempt from antidegradation review
under the overturned provisions. The EPA and the West Virginia DEP have
indicated that they will attempt to revise the policy in accordance with the
courts opinion. Subjecting the Company to the antidegradation review process
could delay the issuance or reissuance of Clean Water Act permits to the
Company or cause these permits to be denied. If the plaintiffs are successful
and if the Company discharges into waters that have been designated as
high-quality by the state, the costs, time and difficulty associated with
obtaining and complying with Clean Water Act permits for surface mining of its
operations could increase.

Comprehensive Environmental Response, Compensation and Liability Act. CERCLA
and similar state laws affect coal mining operations by, among other things,
imposing cleanup requirements for threatened or actual releases of hazardous
substances that may endanger public health or welfare or the environment. Under
CERCLA and similar state laws, joint and several liability may be imposed on
waste generators, site owners and lessees and others regardless of fault or the
legality of the original disposal activity. Although the EPA excludes most
wastes
generated by coal mining and processing operations from the hazardous waste
laws, such wastes can, in certain circumstances, constitute hazardous
substances for the purposes of CERCLA. In addition, the disposal, release or
spilling of some products used by coal companies in operations, such as
chemicals, could implicate the liability provisions of the statute. Thus, coal
mines that the Company currently owns or has previously owned or operated, and
sites to which the Company sent waste materials, may be subject to liability
under CERCLA and similar state laws. In particular, the Company may be liable
under CERCLA or similar state laws for the cleanup of hazardous substance
contamination at sites where it owns surface rights.

Mining Permits and Approvals. Numerous governmental permits or approvals are
required for mining operations. In connection with obtaining these permits and
approvals, the Company may be required to prepare and present to federal, state
or local authorities data pertaining to the effect or impact that any proposed
production of coal may have upon the environment. The requirements imposed by
any of these authorities may be costly and time consuming and may delay
commencement or continuation of mining operations. Regulations also provide
that a mining permit can be refused or revoked if an officer, director or a
shareholder with a 10% or greater interest in the entity is affiliated with
another entity that has outstanding permit violations. Thus, past or ongoing
violations of federal and state mining laws could provide a basis to revoke
existing permits and to deny the issuance of additional permits.

In order to obtain mining permits and approvals from state regulatory
authorities, mine operators, including the Company, must submit a reclamation
plan for restoring, upon the completion of mining operations, the mined
property to its prior condition, productive use or other permitted condition.
Typically the Company submits the necessary permit applications several months
before it plans to begin mining a new area. In the Companys recent experience,
permits generally are approved several months after a completed application is
submitted. In the past, the Company has generally obtained its mining permits
without significant delay. However, the Company cannot be sure that it will not
experience difficulty in obtaining mining permits in the future.

Future legislation and administrative regulations may emphasize the protection
of the environment and, as a consequence, the activities of mine operators,
including the Company, may be more closely regulated. Legislation and
regulations, as well as future interpretations of existing laws, may also
require substantial increases in equipment expenditures and operating costs, as
well as delays, interruptions or the termination of operations. The Company
cannot predict the possible effect of such regulatory changes.

Under some circumstances, substantial fines and penalties, including revocation
or suspension of mining permits, may be imposed under the laws described above.
Monetary sanctions and, in severe circumstances, criminal sanctions may be
imposed for failure to comply with these laws.

Surety Bonds. Federal and state laws require the Company to obtain surety
bonds to secure payment of certain long-term obligations including mine closure
or reclamation costs, federal and state workers compensation costs, coal
leases and other miscellaneous obligations. Many of these bonds are renewable
on a yearly basis upon an expansion of an existing permit. It has become
increasingly difficult for the Company to secure new surety bonds or renew
certain bonds without the posting of collateral. In addition, surety bond costs
have increased while the terms of such bonds have generally become more
unfavorable.

Endangered Species. The federal Endangered Species Act and counterpart state
legislation protects species threatened with possible extinction. Protection of
endangered species may have the effect of prohibiting or delaying the Company
from obtaining mining permits and may include restrictions on timber
harvesting, road building and other mining or agricultural activities in areas
containing the affected species. Certain endangered species are indigenous to
the regions in which the Company operates, but surveys conducted as part of the
permitting process have not verified the existence of these species on Company
property such that mining would be prohibited.

Other Environmental Laws Affecting the Company. The Company is required to
comply with numerous other federal, state and local environmental laws in
addition to those previously discussed. These additional laws include, for
example, the Resource Conservation and Recovery Act, the Safe Drinking Water
Act, the Toxic
Substance Control Act and the Emergency Planning and Community Right-to-Know
Act. The Company believes that it is in substantial compliance with all
applicable environmental laws.

Competition  Excess Industry Capacity

The coal industry is intensely competitive, primarily as a result of the
existence of numerous producers in the coal-producing regions in which the
Company operates, and some of the Companys competitors may have greater
financial resources. The Company competes with several major coal producers in
the Central Appalachian and Powder River Basin areas. The Company also competes
with a number of smaller producers in those and other market regions. The
Company is also subject to the risk of reduced profitability as a result of
excess industry capacity, which results in reduced coal prices.

Demand for coal and the prices that the Company will be able to obtain for its
coal are closely linked to coal consumption patterns of the domestic electric
generation industry, which has accounted for approximately 90% of domestic coal
consumption in recent years. These coal consumption patterns are influenced by
factors beyond the Companys control, including the demand for electricity
(which is dependent to a significant extent on summer and winter temperatures);
government regulation; technological developments and the location,
availability, quality and price of competing sources of coal; other fuels such
as natural gas, oil and nuclear; and alternative energy sources such as
hydroelectric power. Demand for the Companys low-sulfur coal and the prices
that the Company will be able to obtain for it will also be affected by the
price and availability of high-sulfur coal, which can be marketed in tandem
with emissions allowances in order to meet federal Clean Air Act requirements.
Any reduction in the demand for the Companys coal by the domestic electric
generation industry may cause a decline in profitability.

Electric utility deregulation is expected to provide incentives to generators
of electricity to minimize their fuel costs and is believed to have caused
electric generators to be more aggressive in negotiating prices with coal
suppliers. Deregulation may have a negative effect on the Companys
profitability to the extent it causes the Companys customers to be more
cost-sensitive.

In addition, the Companys ability to receive payment for coal sold and
delivered depends on the creditworthiness of its customers. In general, the
creditworthiness of the Companys customers has deteriorated. If such trends
continue, the Companys acceptable customer base may be limited.

Reliance on and Terms of Long-Term Coal Supply Contracts

During 2002, sales of coal under long-term contracts, which are contracts with
a term greater than 12 months, accounted for 84% of the Companys total
revenues. The prices for coal shipped under these contracts may be below the
current market price for similar type coal at any given time. As a consequence
of the substantial volume of its sales which are subject to these long-term
agreements, the Company has less coal available with which to capitalize on
stronger coal prices if and when they arise. In addition, because long-term
contracts typically allow the customer to elect volume flexibility, the
Companys ability to realize the higher prices that may be available in the
spot market may be restricted when customers elect to purchase higher volumes
under such contracts, or the Companys exposure to market-based pricing may be
increased should customers elect to purchase fewer tons. The increasingly short
terms of sales contracts and the consequent absence of price adjustment
provisions in such contracts also make it more likely that inflation related
increases in mining costs during the contract term will not be recovered by the
Company.

Reserve Degradation and Depletion

The Companys profitability depends substantially on its ability to mine coal
reserves that have the geological characteristics that enable them to be mined
at competitive costs. Replacement reserves may not be available when required
or, if available, may not be capable of being mined at costs comparable to
those characteristic of the depleting mines. The Company has in the past
acquired and will in the future acquire, coal reserves for its mine portfolio
from third parties. The Company may not be able to accurately assess the
geological characteristics of any reserves that it acquires, which may
adversely affect the profitability and financial condition of the Company.
Exhaustion of reserves at particular mines can also have an adverse effect on
operating results that is disproportionate to the percentage of overall
production represented by such mines. Mingo Logans Mountaineer Mine is
estimated to exhaust its longwall mineable reserves in 2006. The Mountaineer
Mine generated $33.7 million and $36.7 million of the Companys total operating
income in the year ended 2002 and 2001, respectively.

The Companys mining operations are inherently subject to changing conditions
that can affect levels of production and production costs at particular mines
for varying lengths of time and can result in decreases in profitability.
Weather conditions, equipment replacement or repair, fuel and supply prices,
insurance costs, fires, variations in coal

seam thickness, amounts of
overburden rock and other natural materials, and other geological conditions
have had, and can be expected in the future to have, a significant impact on
operating results. A prolonged disruption of production at any of the Companys
principal mines, particularly its Mingo Logan operation in West Virginia or
Black Thunder mine in Wyoming, would result in a decrease, which could be
material, in the Companys revenues and profitability. Other factors affecting
the production and sale of the Companys coal that could result in decreases in
its profitability include: (i) expiration or termination of, or sales price
redeterminations or suspension of deliveries under, coal supply agreements;
(ii) disruption or increases in the cost of transportation services; (iii)
changes in laws or regulations, including permitting requirements; (iv)
litigation; (v) work stoppages or other labor difficulties; (vi) mine worker
vacation schedules and related maintenance activities; and (vii) changes in
coal market and general economic conditions.

Transportation

The coal industry depends on rail, trucking and barge transportation to deliver
shipments of coal to customers, and transportation costs are a significant
component of the total cost of supplying coal. Disruption of these
transportation services could temporarily impair the Companys ability to
supply coal to its customers. Increases in transportation costs, or changes in
such costs relative to transportation costs for coal produced by its
competitors or for other fuels, could have an adverse effect on the Companys
business and results of operations.

Reserves  Title

The Company bases its reserve information on geological data assembled and
analyzed by its staff which includes various engineers and geologists, and
outside firms. The reserve estimates are annually updated to reflect production
of coal from the reserves and new drilling or other data received. There are
numerous uncertainties inherent in estimating quantities of recoverable
reserves, including many factors beyond the control of the Company. Estimates
of economically recoverable coal reserves and net cash flows necessarily depend
upon a number of variable factors and assumptions, such as geological and
mining conditions which may not be fully identified by available exploration
data or may differ from experience in current operations, historical production
from the area compared with production from other producing areas, the assumed
effects of regulation by governmental agencies, and assumptions concerning coal
prices, operating costs, severance and excise taxes, development costs, and
reclamation costs, all of which may cause estimates to vary considerably from
actual results.

For these reasons, estimates of the economically recoverable quantities
attributable to any particular group of properties, classifications of such
reserves based on risk of recovery and estimates of net cash flows expected
therefrom, prepared by different engineers or by the same engineers at
different times, may vary substantially.
Actual coal tonnage recovered from identified reserve areas or properties, and
revenues and expenditures with respect to the Companys reserves, may vary from
estimates, and such variances may be material. These estimates thus may not
accurately reflect the Companys actual reserves.

The Company continually seeks to expand its operations and coal reserves in the
regions in which it operates through acquisitions of businesses and assets.
Acquisition transactions involve various inherent risks, such as assessing the
value, strengths, weaknesses, contingent and other liabilities, and potential
profitability of acquisition or other transaction candidates; timely approval
of government agencies, the potential loss of key personnel of an acquired
business; the ability to achieve identified operating and financial synergies
anticipated to result from an acquisition or other transaction; and
unanticipated changes in business, industry or general economic conditions that
affect the assumptions underlying the acquisition or other transaction. Any one
or more of these factors could impair the Companys ability to realize the
benefits anticipated to result from the acquisition of businesses or assets.

A significant part of the Companys mining operations are conducted on
properties leased by the Company. The loss of any lease could adversely affect
the Companys ability to develop the associated reserves. Because title to most
of the Companys leased properties and mineral rights is not usually verified
until a commitment is made by the Company to develop a property, which may not
occur until after the Company has obtained necessary permits and completed
exploration of the property, the Companys right to mine certain of its
reserves may be adversely affected if defects in title or boundaries exist. In
order to obtain leases or mining contracts to conduct mining operations on
property where these defects exist, the Company has had to, and may in the
future have to, incur unanticipated costs.

In addition, the Company may not be
able to successfully negotiate new leases or mining contracts for properties
containing additional reserves or maintain its leasehold interests in
properties on which mining operations are not commenced during the term of the
lease.

Certain Contractual Arrangements

The Companys affiliate, Arch Western Resources, LLC, is the owner of Company
reserves and mining facilities in the western United States. The agreement
under which Arch Western was formed provides that a subsidiary of the Company,
as the managing member of Arch Western, generally has exclusive power and
authority to conduct, manage and control the business of Arch Western. However,
consent of BP Amoco, the other member of Arch Western, would generally be
required in the event that Arch Western proposes to make a distribution, incur
indebtedness, sell properties or merge or consolidate with any other entity if,
at such time, Arch Western has a debt rating less favorable than specified
ratings with Moodys Investors Service or Standard & Poors or fails to meet
specified indebtedness and interest ratios.

In connection with the Companys June 1, 1998 acquisition of Atlantic Richfield
Companys (ARCO) coal operations, the Company entered into an agreement under
which it agreed to indemnify ARCO against specified tax liabilities in the
event that these liabilities arise as a result of certain actions taken prior
to June 1, 2013, including the sale or other disposition of certain properties
of Arch Western, the repurchase of certain equity interests in Arch Western by
Arch Western, or the reduction under certain circumstances of indebtedness
incurred by Arch Western in connection with the acquisition. ARCO was acquired
by BP Amoco in 2000. Depending on the time at which any such indemnification
obligation were to arise, it could impact the Companys profitability for the
period in which it arises.

The membership interests in Canyon Fuel, which operates three coal mines in
Utah, are owned 65% by Arch Western and 35% by a subsidiary of ITOCHU
Corporation of Japan. The agreement that governs the management and operations
of Canyon Fuel provides for a management board to manage its business and
affairs. Some major business decisions concerning Canyon Fuel require the vote
of 70% of the membership interests and therefore limit the Companys ability to
make these decisions. These decisions include admission of additional members;
approval of annual business plans; the making of significant capital
expenditures; sales of coal below specified prices; agreements between Canyon
Fuel and any member; the institution or settlement of litigation; a material
change in the nature of Canyon Fuels business or a material acquisition; the
sale or other disposition, including by merger, of assets other than in the
ordinary course of business; incurrence of indebtedness; the entering into of
leases; and the
selection and removal of officers. The Canyon Fuel agreement also contains
various restrictions on the transfer of membership interests in Canyon Fuel.

The Companys Amended and Restated Certificate of Incorporation requires the
affirmative vote of the holders of at least two-thirds of outstanding common
stock voting thereon to approve a merger or consolidation and certain other
fundamental actions involving or affecting control of the Company. The
Companys Bylaws require the affirmative vote of at least two-thirds of the
members of the Board of Directors of the Company in order to declare dividends
and to authorize certain other actions.

CRITICAL ACCOUNTING POLICIES

The Companys Annual Report on Form 10-K for the year ended December 31, 2002
contains a description of the critical accounting policies impacting the
Companys financial statements. Since that report, the Company has changed its
method of accounting for its final mine closure reclamation liabilities to
comply with FAS 143. Asset retirement obligations recorded in accordance with
FAS 143 depend on the estimates and assumptions described in the Companys
Annual Report on Form 10-K, as well as the following:



Discount rate  FAS 143 requires the asset retirement
obligation to be recorded at its fair value. In accordance with the
provisions of FAS 143, the Company utilized discounted cash flow
techniques to estimate the fair value of its obligations. The rates
used by the Company are based on rates for treasury bonds with
maturities similar to expected mine lives, adjusted for the
Companys credit standing.

Third-party margin  FAS 143 requires the measurement of an
obligation to be based upon the amount a third party would demand to
assume the obligation. Because the Company plans to perform a
significant amount of its final mine closure reclamation activities
with internal resources, a third-party margin was added to the
estimated costs of these activities. This margin was estimated based
on the Companys historical experience with contractors performing
certain types of reclamation activities. The inclusion of this
margin will result in a recorded obligation that is greater than the
Companys estimates of its cost to perform the reclamation
activities. If the Companys cost estimates are accurate, the excess
of the recorded obligation over the cost incurred to perform the
work will be recorded as a gain at the time that reclamation work is
completed.

The information required by this Item is contained under the caption
Managements Discussion and Analysis of Financial Condition and Results of
Operations in this report and is incorporated herein by reference.

ITEM 4. CONTROLS AND PROCEDURES

The information required by this Item is contained under the caption
Managements Discussion and Analysis of Financial Condition and Results of
Operations in this report and is incorporated herein by reference.

PART II  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information required by this Item is contained in the Contingencies 
Legal Contingencies section of Managements Discussion and Analysis of
Financial Condition and Results of Operations in this report and is
incorporated herein by reference.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)

3.1

Amended and Restated Certificate of Incorporation of Arch Coal, Inc.
(incorporated herein by reference to Exhibit 3.1 to the Companys
Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2000)

3.2

Amended and Restated Bylaws of Arch Coal, Inc. (incorporated herein by
reference to Exhibit 3.2 to the Companys Annual Report on Form 10-K for
the Year Ended December 31, 2000)

3.3

Certificate of Designations Establishing the Designations, Powers,
Preferences, Rights, Qualifications, Limitations and Restrictions of the
Companys 5% Perpetual Cumulative Convertible Preferred Stock
(incorporated herein by reference to Exhibit 3 to current report on Form
8-A filed on March 5, 2003)

4.1

Third Amendment to Credit Agreement effective August 19, 2003 by and among Arch
Coal, Inc., the Lenders party thereto, PNC Bank, National Association, as
administrative agent, and Citibank, N.A., Credit Lyonnais New York Branch and
U.S. Bank National Association, as co-documentation agents.

4.2

Credit Agreement dated September 19, 2003 by and among Arch Western Resources,
LLC and the Lenders party thereto and PNC Bank, National Association, as agent,
and PNC Capital Markets, Inc., as lead arranger and bookrunner (incorporated
herein by reference to Exhibit 4.5 to Amendment No. 1 to Form S-4 of Arch
Western Finance, LLC (Reg. No. 333-107569)).

31.1

Certification of Principal Executive Officer Pursuant to § 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Principal Financial Officer Pursuant to § 302 of the Sarbanes-Oxley Act of 2002.